Entries from September 2009 ↓

Between the 1970s decadence of the Winnipeg airport and the insouciance of Westjet, an idle traveller with a newspaper is a dangerous thing.

I mean, look what I learned:

Tourism in Manitoba’s in the crapper. Visits from Americans have plunged, hotel vacancy rates are up and business in poor Churchill is off 30%.

The giant government fund standing behind US banks is empty. Goose eggs. Starkers. The Federal Deposit Insurance Corporation has burned through $60 billion and will remain in the red until at least 2012, despite a massive new levy on solvent banks. Evidently saving capitalism’s a bitch.

Tons of grapes will rot on the vines in the Niagara Peninsula and the Okanagan this autumn as the Canadian wine industry deflates. Prices have crashed by 40% or so as consumers stop boozing, or turn to rotgut. In a classic case of supply and demand, supply loses.

Expect the orgy of bank loans and cheap money to end soon, says the IMF. As the government stimulus tap starts to shut in North American and Europe, â€˜funding gapsâ€™ will materialize, which will stall the recovery and likely add to unemployment.

And, of course, a new ruckus over whether the economy is getting plumper or limper in the wake of plunging numbers in Japan, news Canada stalled out again and predictions the US faces a lost decade.

Man, was it just a few weeks ago the recession, human despair and bad hair days were declared over in the wake of a single monthâ€™s uptick? As noted on this blog, economists from the big banks along with politicians fell over themselves lauding an historically short downturn and a return to our normal ways.

They wish.

There is nothing normal about current times. Days ahead will be even less predictable.Â Weâ€™re in the throes of a battle between inflation and deflation, between those betting on economic breakout thanks to government trillions and others convinced weâ€™ve not paid yet for the sins of a generation of mindless borrowing and over-consumption.

In one scenario, higher energy prices, higher taxes and interest rates, higher equity markets, modest growth and a slow but jobless recovery. In the other, financially-stressed consumers unable or unwilling to pick up the tab as stimulus programs wind down. Economies sputter, demand falters, prices drop, unemployment rises, interest rates fester, government debt spirals, equities reverse, and weâ€™re back on the edge of the cliff.

Nobody can guarantee which scenario will dominate, although a desperate media, business elite and political cadre will continue to goad consumers into spending and borrowing, whatever the consequences. How could it be otherwise? The entire ruling class, yoked to the belief growth must be continuous and incessant, chose to deal with the events of a year ago with a mega-dose of Keynesian tonic. Instead of letting excesses correct, they gave us more excess (2% mortgages, home reno tax credit, cash for clunkers, CMHC enema, bailout billions, and endless TV ads).

Needless to say, deflation is far more destructive than inflation. You need to be aware of it, watch for it, and take steps to prepare.

Judging by some comments here in the last twenty-four hours, there are people disturbed I would write such things. And while I personally think higher rates, higher taxes and a sputtering economy are what likely lies ahead, a deflationary spiral into the unknown has been a possibility now for almost a year. Last winter I put the odds at 20%. Still do.

Donâ€™t know about you, but anything I judge has a 20% chance of happening to me, I do something about. Itâ€™s called insurance. Maybe you should get some, too.

If inflation wins and rates rise, the market will correct. Has to. Affordability takes a big hit and an asset priced at the top of its cycle declines. Hundreds of thousands of people face the real potential of negative equity.

If deflation wins, and rates stagnate, the market will correct. Has to. Falling demand, consumer stress, rising unemployment and business failure dictate it. Hundreds of thousands of people in this scenario also face negative equity.

There is one consistent message on this blog. Whether you like it or not.

“Okay, this is a shocker,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “We’re not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull.

Imported wine at seven bucks a bottle. Incredibly cheap food, jeans and household staples. Real estate prices 40% below levels of more than a decade ago. Structural unemployment and families that save a fifth of their gross income.

Welcome to Japan, and the new face of deflation.

The countryâ€™s in the news this week after the latest stats showing Japanese prices racing downwards at an unprecedented clip. Now we hear that Germany has been in a price decline for four months and, of course, Canadaâ€™s inflation rate has been negative since mid-summer.

This utterly confounds those among us who have been gleefully predicting hyperinflation, as central banks print wheelbarrows full of money, as governments borrow without limit, and stimulus spending goes off the chart. Especially loud have been gold bugs dreaming of their basement rock collections soaring in value, and real estate investors praying runaway asset values will be their ticket out of debt.

But what if theyâ€™re totally wrong?

Hereâ€™s the other argument: Prices are in a gentle downward slope which will only pick up speed as demand withers and producers are forced to cut prices again…and again. Why would that happen?

The growing legion of the unemployed, the underemployed and the utterly discouraged. Official jobless levels are pushing 10% in North America, but lots of economists say when you count in the folks who have given up, the ones no longer collecting benefits and the Boomers who will never work again, itâ€™s closer to 17%. Jobless people donâ€™t buy much, after all.

Meanwhile consumer incomes are going down, not up. Real incomes are lower in the US, and most of Europe. If it were not for â€œcash for clunkersâ€ and homebuying grants in the States, the home reno tax credit in Canada and 3% mortgages, what would the economic landscape look like? And what will transpire when the artificial government stimulus finally ends?

Reduced demand has led to overcapacity, withering corporate profits and a drying up of new business investment. This creates a vicious circle in which there is no new job creation, therefore no increase in consumer income, no consumer spending surge, no new demand, no new jobs. And how can we rationally expect anything different, when consumer spending accounts for 60% of all economic activity?

So, if price deflation becomes asset deflation, dropping the relative value of computers, bungalows, cars, commodities and iPhones, where does that leave most Canadian families?

Well, figure it out. Unlike Japan, families here have basically no savings. Unlike the Japanese, who have had 20 years to deal with deflation, we have the highest personal debt rate in history. Unlike in Japan, we have a housing bubble creating new billions in mortgage borrowings. Unlike Japan, a large portion of our national wealth depends on digging stuff out of the ground and selling it â€“ commodities.

The downside potential is unlimited. And thatâ€™s what scares economists. Deflationâ€™s a monster.

The good news: Those higher interest rates will take a lot longer getting here.

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The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.